Can You Buy a 5-Unit Property with FHA? Understanding the 4-Unit Limit & Alternatives
No, you cannot buy a 5-unit property with an FHA loan. FHA financing is strictly limited to properties with 1 to 4 residential units. Once a property reaches 5 or more units, it crosses the threshold from residential to commercial real estate, requiring different financing solutions entirely.
This limitation often surprises investors who've successfully used FHA's low down payment requirements for duplexes, triplexes, or fourplexes. At Clear House Lending, we regularly help investors navigate this transition, finding the right multifamily financing solutions for 5+ unit properties that align with their investment goals.
Understanding why this limit exists—and what alternatives are available—can help you make smarter decisions as you scale your real estate portfolio. Let's break down everything you need to know about financing properties with 5 or more units.
FHA vs. Commercial Multifamily Financing
The difference between financing a 4-unit property and a 5-unit property is dramatic. While FHA allows owner-occupants to purchase fourplexes with just 3.5% down, stepping up to five units typically requires 20-30% down and fundamentally different loan structures.
This isn't arbitrary—it reflects how the real estate and lending industries categorize properties. The 4-unit threshold marks the dividing line between residential and commercial real estate, affecting everything from appraisal methods to loan underwriting criteria.
Why FHA Loans Are Limited to 4 Units
FHA (Federal Housing Administration) loans are designed to help Americans achieve homeownership, not to finance commercial real estate investments. The 4-unit limit directly reflects this residential focus.
The Residential vs. Commercial Divide
Properties with 1-4 units are classified as residential real estate under federal lending guidelines. They're valued using comparable sales (like single-family homes) and can be financed with conventional residential mortgages, including FHA, VA, and conforming loans.
Properties with 5+ units are classified as commercial real estate. They're valued based on income (using capitalization rates and net operating income) and require commercial lending products with different underwriting standards, documentation requirements, and risk assessments.
FHA Program Requirements
To use an FHA loan for any multifamily property (2-4 units), you must:
- Occupy one unit as your primary residence for at least one year
- Meet FHA credit and income requirements through traditional documentation
- Stay within FHA loan limits for your county
- Pay mortgage insurance premium (MIP) for the life of the loan or until refinancing
These requirements don't translate well to larger investment properties, where owners typically don't live on-site and the property's income matters more than personal finances.
FHA vs. Commercial Loan Comparison
Understanding the key differences between FHA and commercial financing helps clarify why you need different strategies for 5+ unit properties. While FHA offers attractive terms for owner-occupants, commercial loans provide flexibility that serious investors need.
The most significant differences involve down payment requirements, income verification methods, and how lenders evaluate the deal. Commercial lenders focus heavily on the property's ability to generate income, while FHA lenders focus on the borrower's personal qualifications.
Financing Alternatives for 5+ Unit Properties
When FHA isn't an option, several financing pathways can help you acquire or construct multifamily properties with 5 or more units.
DSCR Loans (Debt Service Coverage Ratio)
DSCR loans have become the go-to financing option for investors purchasing 5+ unit properties. Unlike traditional mortgages that require W-2s, tax returns, and debt-to-income calculations, DSCR loans qualify borrowers based primarily on the property's cash flow.
How DSCR Works:
The debt service coverage ratio measures whether a property's net operating income (NOI) can cover the mortgage payment. A DSCR of 1.25 means the property generates 25% more income than needed for the loan payment, providing a cushion for vacancies and unexpected expenses.
DSCR Loan Benefits for 5+ Units:
- No personal income verification required
- Faster approval process (2-4 weeks typical)
- Close in LLC or business entity name
- Scale your portfolio without DTI limits
- Available for both acquisition and construction
Use our DSCR calculator to estimate whether your target property meets DSCR requirements before applying.
Typical DSCR Loan Terms:
- Down payment: 20-25%
- Interest rates: 6.5-8.5%
- Minimum DSCR: 1.20-1.25
- Credit score: 660+ preferred
- Loan terms: 30-year amortization with 5-7 year adjustable periods
Bank Portfolio Loans
Local and regional banks often hold commercial real estate loans in their own portfolios rather than selling them to secondary markets. This gives them flexibility to structure deals creatively and work with borrowers who don't fit traditional lending boxes.
Advantages of Portfolio Lending:
- Relationship-based underwriting
- Flexible terms and structures
- Local market knowledge
- Potential for cross-collateralization
- Combined financing for land and construction
Portfolio loans work particularly well for investors with established banking relationships or those purchasing properties in markets where the bank has strong local presence.
SBA 504 Loans
The Small Business Administration's 504 loan program offers attractive financing for owner-occupied commercial properties, including multifamily buildings with 5+ units where the borrower occupies a portion of the property for business purposes.
SBA 504 Key Features:
- Down payment as low as 10%
- Fixed rates for 20-25 year terms
- Job creation requirements
- Owner-occupancy requirement (51%+ of space)
- Longer approval timeline (60-90 days)
SBA loans require more documentation and have specific eligibility criteria, but the low down payment and fixed rates make them worth considering for qualifying projects.
Fannie Mae and Freddie Mac (Agency Loans)
For stabilized multifamily properties with strong occupancy and cash flow, agency loans through Fannie Mae's Multifamily program or Freddie Mac's Optigo platform offer some of the best rates and terms available.
Agency Loan Characteristics:
- Competitive interest rates
- Non-recourse options available
- Terms up to 30 years
- Minimum loan amounts ($1M+ typical)
- Property must be stabilized (90%+ occupancy)
Agency financing works best for existing properties with established operating history. For new construction or value-add projects, you'll typically need bridge financing first, then refinance into agency debt after stabilization.
Bridge Loans and Hard Money
When timing is critical or a property needs repositioning before qualifying for permanent financing, bridge loans provide short-term capital to acquire and improve multifamily properties.
Bridge Loan Use Cases:
- Quick acquisitions in competitive markets
- Value-add renovations
- Lease-up period financing
- Turnaround situations
- Construction completion financing
Bridge loans typically carry higher interest rates (9-12%) and shorter terms (12-36 months), but they offer speed and flexibility that conventional financing can't match.
Best Alternatives to FHA for 5+ Unit Properties
Choosing the right financing depends on your specific situation, including your experience level, available capital, investment timeline, and the property's current condition.
For First-Time 5+ Unit Investors
If you're transitioning from smaller residential properties to your first commercial multifamily deal, consider:
- Start with a 5-8 unit property - These "small balance" commercial properties often have more accessible financing requirements
- Partner with experienced investors - Adding a seasoned partner can help you qualify for better terms
- Focus on stabilized properties - Properties with existing tenants and cash flow are easier to finance
- Build banking relationships early - Local banks are more likely to work with newer investors they know
For Experienced Investors Scaling Up
If you already own multifamily properties and want to expand into larger deals:
- Leverage DSCR lending - Your portfolio income doesn't count against you
- Consider blanket loans - Finance multiple properties under single debt
- Explore agency financing - Better rates for larger, stabilized assets
- Use bridge-to-perm strategies - Acquire and improve, then refinance at better terms
For Ground-Up Construction
Building new multifamily properties with 5+ units requires construction financing, which differs significantly from acquisition loans:
- Construction loans fund in draws as building progresses
- Higher interest rates during construction phase
- Requires detailed plans, permits, and contractor documentation
- Converts to permanent financing after completion
- Typical LTC (loan-to-cost) ratios of 65-80%
Contact Clear House Lending to discuss construction financing options for your multifamily development project.
Key Considerations When Financing 5+ Unit Properties
Down Payment Requirements
Plan for 20-30% down payment on most 5+ unit financing. While this is significantly higher than FHA's 3.5%, the property's income potential typically justifies the larger equity investment.
Strategies to meet down payment requirements:
- Save from existing rental property cash flow
- Use equity from other properties (cash-out refinance or HELOC)
- Bring in equity partners or investors
- Seller financing for portion of purchase price
- Combine multiple capital sources
Property Income Analysis
Commercial lenders evaluate 5+ unit properties based on their income-producing potential. Before applying for financing, prepare:
- Rent roll - Current tenants, lease terms, and rental rates
- Operating statements - 12-24 months of income and expense history
- Market rent analysis - Comparison to similar properties
- Expense projections - Realistic operating costs including management
- Capital improvement budget - Planned upgrades and maintenance
Personal Guarantee vs. Non-Recourse
Most commercial multifamily loans require personal guarantees, meaning you're personally liable if the property can't cover the debt. However, some loan programs (particularly agency loans for larger properties) offer non-recourse terms where only the property serves as collateral.
Understand the guarantee requirements before signing and consider how they fit into your overall risk management strategy.
Exit Strategy Planning
Lenders want to understand your long-term plans for the property. Common exit strategies include:
- Hold and cash flow - Long-term ownership for rental income
- Value-add and refinance - Improve property, increase NOI, refinance at better terms
- Buy and sell - Flip to another investor after improvements
- 1031 exchange - Sell and defer taxes by purchasing larger property
Having a clear, realistic exit strategy strengthens your loan application and demonstrates investment sophistication.
Ready to Finance Your 5+ Unit Property?
While FHA loans aren't available for 5+ unit properties, numerous financing options exist for investors ready to scale into commercial multifamily real estate. The key is matching the right loan product to your specific situation, property type, and investment goals.
At Clear House Lending, we specialize in multifamily construction and investment loans for properties of all sizes. Whether you're purchasing an existing 5-unit building, developing a 50-unit apartment complex, or anything in between, our team can help you navigate commercial financing options and secure competitive terms.
Next Steps:
- Evaluate your target property using our DSCR calculator to estimate cash flow coverage
- Review your capital position to determine down payment availability
- Gather property documentation including rent rolls and operating statements
- Contact our lending team to discuss financing options for your specific project
Don't let the FHA 4-unit limit hold back your multifamily investment goals. Commercial financing for 5+ unit properties offers flexibility, scalability, and income-based qualification that can actually work better for serious real estate investors.
Apply now to get pre-qualified for 5+ unit multifamily financing, or schedule a consultation with our commercial lending specialists to explore your options.
Looking to build your multifamily portfolio? Visit our multifamily property solutions page to learn about our specialized loan programs for properties of all sizes, from small apartment buildings to large-scale developments.